How Credit Card Processing Fees Work – The Ultimate Guide

The credit card processing fees you pay depend on the pricing model used by your merchant provider. To select the right model for your business and not overpay, it’s important to clearly understand how credit card processing fees work. This guide explains how credit card processors work so you can pick the best solution and fee structure.

If you’re looking for the simplest, most transparent payment provider, we recommend trying Square. It has low flat-rate processing fees and no startup, monthly, or cancellation fees, so it’s completely risk-free. Plus you get free point-of-sale (POS) software to help manage your business and a free mobile credit card reader upon signup. Click here for a free Square account.

How Credit Card Processing Fees Work

There are 4 primary factors that affect the credit card processing fees that you pay when you charge a credit card. These are:

The Interchange Rate

This rate is what credit card issuers (Visa, Mastercard, American Express, Discover) charge for processing credit cards. The interchange rate varies depending on credit card type. For example, a rewards card and a corporate credit card have different interchange rates (see a full list here). Since interchange rates are what merchant account providers actually pay to card issuers, these rates are non-negotiable.

The Merchant Account Provider Fee

In order to connect to the credit card networks to process credit cards, you need a merchant account. Merchant account providers make their money by charging a fee (or fees) on top of the interchange rate. These fees are negotiable and generally based on your sales volume and type of business. So, different businesses may pay completely different rates, even with the same merchant account provider.

How the Card is Processed

The merchant account provider fee will vary based on how the card is processed. In-store transactions (where the customer is swiping their own card) have the lowest risk of fraud, and therefore generally have the lowest fees. Online transactions (website orders) and keyed-in transactions (when you take an order over the phone), have a higher risk of fraud, and will therefore generally have higher fees.

Setup & Monthly Fees

Some merchant account providers will charge you a setup fee and ongoing monthly fees to cover things like support and security/PCI compliance. Some even have account cancellation fees that can be costly if want to change providers. Others, like Square, have no setup, account, or cancellation fees, which makes it a popular, no-risk option for small businesses.

Since the interchange rate isn’t negotiable, what you end up paying in credit card processing fees all comes down to the merchant account provider you choose.

How Merchant Account Providers Set Credit Card Processing Fees

As we explained above, interchange rates are set by the credit card issuers and are non-negotiable. Merchant account providers are the middlemen between you and the credit card companies and their fee is what you actually pay when you process a credit card.

Merchant account providers use 3 different types of fee structures, which include:

1. Flat-rate credit card processing fees

You pay a simple, flat-rate fee, regardless of the type of credit card being processed. For example, our recommended flat rate pricing provider Square, charges 2.75% for all in-store transactions, regardless of the type of card used. The advantage of flat-rate pricing is simplicity: You know exactly how much you are paying each time you process a credit card, regardless of the type of card.

Square tops the list for flat-rate providers because Square gives you everything you need to accept credit cards via computer, smartphone, or tablet for free, including a credit card reader and powerful POS software. Providers that use the following two types of fees generally charge for card-reading hardware and don’t provide free business management software. Plus, most tack on monthly account fees. This is something to be aware of when shopping for a payment solution.

2. Interchange-plus credit card processing fees

With interchange-plus pricing, you pay a fixed amount above the interchange rate. For example, our recommended small business interchange-plus provider, Cayan, has rates that start at .5% + 15¢ per transaction above the interchange rate. Here’s an example how this rate works for a typical retail Visa credit card or debit card charge:

As you can see above, with interchange-plus pricing you can get a lower rate than a flat-rate provider. Using this example, to process a Visa card charge in a retail store, you would currently pay:

2.01% + 25¢ per transaction with Cayan vs.2.75% with Square

Interchange-plus plans can save you money when sales reach a certain volume. But, rates vary based on sales volume, business type, and other factors, so interchange-plus is more complicated to understand and set up than flat-rate solutions like Square. Plus you’ll usually have monthly fees, which you won’t see with Square. We’ll cover these details below.

3. Tiered credit card processing fees

With tiered pricing, the fees your merchant provider adds on to interchange rates aren’t fixed, so the amount you pay varies widely depending on the type of card you are processing. Tiered pricing is fraught with unpredictable add-on fees and incomprehensible billing statements. Because of this, it’s very difficult to understand exactly how much you’re being charged and to compare this against other providers to ensure you’re getting the best deal. For this reason, we recommend that small businesses avoid tiered credit card processing fee plans.

Which Type of Merchant Account Provider is Right for You?

A flat-rate merchant account provider like Square is generally the best option unless you charge over $30,000 per month or sell a lot of high-value items.

Square is perfect for small retailers because it’s simple to set up and use and has no setup or monthly fees. Plus, you get a full-blown point of sale (POS) system for free, which gives you a complete set of sales and business management tools. With your free Square account, you can accept in-store, mobile, online, and invoice payments; manage inventory; track sales, customers, and employees; receive tips, give discounts, and record cash and check transactions; process refunds and print, email, or SMS sales receipts; and much more.

Square gives you all of this for free but makes up for it by charging a slightly higher credit card processing fee compared to interchange-plus pricing. At face value, Square’s fixed 2.75% flat rate seems higher than Cayan’s 2.01% + 25¢ per transaction fee.

However, in many cases, Square’s flat-fee will still cost you less than interchange-plus rates. This is because Square has no per-transaction or monthly fees. To know which type of credit card processing fees, flat-rate or interchange-plus, are best for your business, you simply need to run the numbers.

Square Flat-Rate Fees vs. Cayan Interchange-Plus Fees

Below, we compare flat rate pricing and interchange plus pricing at two different revenue points: $10,000/month and $30,000/month in credit card transactions. The example uses a Visa retail card swipe with an average sale amount of $65.

As you can see from the above table, at $10,000/month in revenue, Square costs you $588 less per year. Even though Cayan charges you lower processing fees, the added cost of the monthly fee, plus the amount you have to pay for POS software (we used Shopkeep as an example) makes it more expensive than Square.

Based on our calculations, the tipping point is when you reach about $30,000/month in credit card charges. At this sales volume, Cayan’s interchange-plus pricing beats Square’s flat-fee pricing because the lower processing fees outweigh the added monthly and POS system costs.

Keep in mind, however, all of these calculations use an average order value of $65. As we’ll show you next, changing your average sale amount can have a huge impact on your credit card processing fees.

How Average Order Value Affects Credit Card Fees

The average amount your customers spend can have a big impact on your credit card processing fees if you use interchange plus pricing. Here’s a look at how interchange-plus and flat-rate processing fees differ based on your average sale value.

As shown in the table above, if your customers tend to make big purchases say, $100 per sale, then an interchange-plus merchant account provider like Cayan can save you money in credit card processing fees. But if your sales average around $10, then a flat-rate provider like Square gives you far lower credit card processing rates.

This is because Cayan charges 25¢ per transaction in addition to the 2.01% processing fee. For example, using Cayan, a customer buying a $10 tee shirt would cost you 45¢ in processing fees (2.01% x $10 + 25¢ = 45¢). With Square, you’d pay just 27.5¢ (2.75% x $10 = 27.5¢) to sell the tee because of their flat-rate 2.75% fee.

But if you sell large-ticket items, like $100 Bluetooth speakers, your fees are $2.26 per sale with Cayan (2.01% x $100 + 25¢ = $2.26), but you’ll pay $2.75 in fees with Square (2.75% x $100 = $2.75). That’s a saving of 49¢ per-sale with Cayan on a $100 sale, and it can really add up.

How to Choose An Interchange Plus Merchant Account Provider

At this point, you should have a good idea whether flat-rate or interchange-plus pricing is better for your business. If you want to sign up with a flat-rate merchant account provider, we highly recommend Square for their simple processing rates, $0 account fees, and free POS features.

If you’ve decided that interchange plus is a better choice for your business, there are a few more considerations to keep in mind. We’ll discuss those next:

The Lowest Small Business Interchange-Plus Provider We Found is Cayan

Cayan charges .5% + 15¢ above interchange and works with low-volume sellers. We haven’t seen a merchant account provider advertise a lower rate than this without a monthly sales minimum (Dharma, for example, offers a lower rate but has a $10,000/month sales minimum). So, when price-shopping different providers Cayan’s rate is a good baseline rate to use.

Keep an Eye out for Monthly Fees

Monthly processing fees – In addition to the per transaction percentage rate and fixed rate fees, some providers charge a monthly or annual fee. Cayan charges a reasonable $16 per month.

PCI compliance fees – This is a fee for compliance with Payment Card Industry (PCI) standards, which require merchants that accept credit cards to meet certain security standards. The cost is often around $20 per month. Cayan does not charge a separate PCI compliance fee, it’s built into the monthly fee.

Customer service fees – There may be a fee for phone-based customer service support. Cayan does not charge a fee for their phone, email and live-chat support.

Fees can vary significantly based on your provider, so we encourage you to ask as many questions as you can before signing up.

Keep an Eye Out For Upfront, Setup & Cancellation Fees

Some merchant card processors also charge upfront fees for setup and training. Cayan typically does not charge any of these fees for standard account needs (nor does Square):

TrainingFee – for the credit card processor to walk you through how to use the system you purchased.

Customization Fee – for the credit card processor to modify its system to fit your specific needs.

System Integration Fee – there may also be a fee if you need to integrate a credit card processor’s software with accounting software or ecommerce solutions.

Cancellation Fees – some merchant account providers charge an account cancellation fee if you cancel service before a specific time has elapsed. This is common if you have what are called contracted rates. But if you have a no-contract monthly plan, such as Cayan offers, you can change your service without penalties.

To avoid any unexpected costs on your merchant account statement, ask potential providers about upfront, setup, and cancellation fees before signing up. And get any no-fees agreements in writing!

How to Negotiate Credit Card Processing Fees

If you’re doing a large volume of credit card processing, say around $10K per month, you usually can negotiate your credit card processing fees. With interchange-plus providers, you know you’re going to pay a fixed percentage rate and fixed per-transaction fee. So when negotiating, you can ask for a lower fixed percentage, lower per-transaction fee, or both.

When to negotiate a lower percentage rate:

If your average sales are high-value, then you want to focus on lowering the fixed percentage because that’s what really impacts your bottom line. The difference between a 2% and 3% rate on a high-value purchase, like a $1,000 jewelry purchase is large: $10 per sale. Whereas a per-transaction fee like Cayan’s 25¢ fee is small, literally pennies, by comparison.

When to negotiate a lower per-transaction fee:

On the other hand, if you make lots of lower-priced sales, it’s better to try to lower your fixed fee. For instance, 2.01% of a $5 transaction is only around 10¢, but if you make 100 $5 transactions per day, a 25¢ per-transaction fee adds up to $25 per day.

With Cayan, our recommended interchange-plus merchant services provider, you can negotiate your rates when you reach about $10,000 per month in credit card sales, click here to learn more. In fact, you can even negotiate your flat-rate fees with Square when you reach $250 per year in sales, learn more here.

Interpreting an Interchange-Plus Merchant Statement

Whether you’re a new business or have been around for a while, it can be confusing to understand all the fees you see on a credit card statement. Let’s walk through a typical merchant statement so you better understand what you’re paying and if you’re paying too much.

There are 2 key parts of a merchant statement that you need to closely read each month. The other sections contain information that you typically don’t need to study too closely.

1. The Deposits & Fees Overview

2. The Fee Summary

This is usually found on Pages 3-5 of your merchant statement and it breaks out all of the fees that are summarized in your Deposits & Fees Summary. Here you’ll see the fee breakdown for all respective credit card brands, plus see your merchant account processor fees section. This section looks something like this:

Click to enlarge

Click to enlarge

Now let’s see how to use information from this statement to calculate what’s called your Effective Rate. Knowing this percentage is critical to understanding if you are getting a good deal on your credit card processing fees.

How to Ensure You’re Getting the Best Credit Card Processing Fees

Your effective rate is the total average percentage you pay to process a single credit card. To calculate your effective rate, divide your total credit card processing fees by your total deposits in the same period, like this:

Total Credit Card Processing Fees ÷ Total Deposits = Effective Rate

The average effective rate for credit card processing varies by provider. In general, merchant processors will likely offer you an effective rate somewhere between 2.9% to 3.3%. You can try to negotiate that down, especially if you have high sales volume.

Here’s how to figure your effective rate using data from our Page 1 example, above. Take the total fees charged and divide by total deposits made:

$736.40 (total fees charged) ÷ $23,990.83 (total deposits) = .0306%

This is a 3.06% Effective Rate

That’s a good effective rate, but what you found it was higher, say 3.6%? First, you need to refer to your merchant processor account fees, usually found on Page 3 of your statement. This section details exactly what your merchant account provider is charging you, as shown here:

Here, you can see this business is getting charged for the card types, debit cards, plus a monthly PCI fee by this merchant account processor. You’ll also see other monthly processor fees and charges in this section. If you’re unsure of any fees on your statement, ask your provider about them.

To make sure you’re getting the best deal on your credit card processing fees, you want to compare this section of your merchant statement to the fees charged by other processors. Any possible savings will stand out when fees are compared side-by-side.

Also, you can always ask your merchant account provider to calculate and explain your effective rate. At the very least, you’ll find out exactly what you’re paying for, and why. If this rate seems high, it might be time to shop around or re-negotiate lower rates with your current processor. You might be surprised at how much you can save by regularly reviewing your rates and shopping around.

The Bottom Line

There are two main credit card processing fee plans suitable for small business; flat-rate pricing like Square and interchange-plus pricing like Cayan. There is a third pricing model called tiered pricing, but in our opinion, this is totally unsuitable for small businesses.

We recommend that most small businesses use Square for its simple, predictable flat-rate fees and fabulous free POS software that can help you manage all of your retail, online, and mobile sales.

But, Cayan makes sense when you sell in higher volumes because interchange-plus credit card processing fees can beat Square’s rates and outweigh the added free benefits. As a rule of thumb, this is around $30K per month in credit card sales. But if your average sale value is higher than $100, this threshold can be even lower.

Last but not least, if you’re considering interchange-plus pricing, be sure to discuss effective rates, upfront, monthly, and cancellation fees, hardware fees, and any other fees with potential providers. Ask about these up-front and go with the merchant account processor that you feel is the most honest and fair with their rates.

Do you accept credit cards for your business? What merchant account provider do you use and why? Is a flat-fee provider like Square your top choice or do you use an interchange-plus or tiered model? We’d love to hear your insights and experiences in the comments below.

About the Author

Krista Fabregas

Krista Fabregas is a staff writer at Fit Small Business and editor of the Ecommerce Section. Krista launched her first ecommerce site in 2001, and soon grew to operate two niche B2B and B2C sites, a 10K square foot warehouse, and staff of nine. Combined, her sites sold more than $1.5M annually for several years. Krista now shares her hand-on experience with others looking to expand into online sales. When not helping small business owners launch and grow efficient ecommerce operations, Krista enjoys writing fiction and nonfiction, and riding horses and motorcycles in her hometown of Houston.

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Comments (42)Disclaimer: Reviews on FitSmallBusiness.com are the product of independent research by our writers, researchers, and editorial team. User reviews and comments are contributions from independent users not affiliated with FitSmallBusiness.com's editorial team. Banks, issuers, credit card companies, and other product & service providers are not responsible for any content posted on FitSmallBusiness.com. As such, they do not endorse or guarantee any posted comments or reviews.Post Your Comment

I am needing to find a merchant asap. We are a small busines and never have taken credit cards in the past. We are in contract with a big contractor that only wants to pay using their American Express CC. The 1st payment will be about $100k, then 2 transactions about $60k ea. the another $45k and 2 more for about $25k ea. and that will be the biggest ever and most likely the only transactions for the year. what do you recommend? FD quoted 2.29% + .19 cents per swipe, $40 for the device and $5 month or 3.29% + .19 cents per transcation when entered information. your advice would greatly be appreciated.

Large transaction processing can be tricky. Many standard processors have charge thresholds well under $100k, especially if you don’t have a track record of credit card processing for your business. For this, you might want to talk to your banker to have a go-to person if the charge has to be pushed through. You can also try Cayan, they’re a big processor and you can get someone on the phone who can help you with specialty high threshold accounts, which it sounds like you need. Good luck!

Great article sir! I have been graced with a cutting edge concept in this complex world known as credit card fees. Would you be able to direct a chap in the right direction? Who would you start with? Banking institutions? Interchange rate afficianodos? This idea was confirmed with an unsolicited bible verse sent my way the day after the epiphany.

Isaiah 60 v:5 (NLT)
My eyes will shine,and my heart will thrill with joy, for MERCHANTS from around the world, will come to me! They will bring me the wealth of many lands!!! I look forward to hearing your wisdom!! Many thanks. Tom Fendley. Norridge Illinois, USA

Well, credit card fees are set by the card issuers like Visa and Mastercard, then the payment gateway services like Authorize Net, PayPal, Pay Junction, etc., tack on processing fees to these. So maybe start with Visa and MasterCard?

I believe it would depend on the specific contract/terms of service you have with the provider. That said, fee fluctuations are more common with interchange plus than flat rate providers. PracticalEcommerce has a helpful guide on what to do when you discover a fee increase.

Hello Brenda.. given you are processing $500-$600 per month is makes most sense for you to consider a merchant services provider with flat rate pricing like Square or PayPal. This is because they are easy to set-up, there are no upfront costs, no monthly administration costs and you can stop using square without any cost implications either. I would recommend Square over PayPal because Square comes with powerful free Point-of-Sale software that will allow you to not only complete credit card transactions but also manage your inventory and run reports so that you can see how your shop is performing and identify ways to improve. I would test Square and see how this changes your month to month profits and then make a final decision on whether to continue accepting credit cards. (NB I would still encourage customers to pay in cash if they have it as this avoids you paying Square 2.75% in credit card processing fees). Hope this helps.

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